The FTC’s lawsuit against Gary Kieper and Partners in Health Care Association (PIHC) alleged that the defendants deceptively peddled medical discount cards in the guise of health insurance. “Medical discount cards? Not my line,” you might say. But don’t discount the foundational legal principles articulated in the Court’s Order granting the FTC’s Motion for Summary Judgment.
The Wisconsin-based defendants targeted people – including Spanish-speaking consumers – who had pre-existing conditions, had lost their jobs, or were otherwise struggling to afford health insurance. Consumers paid an enrollment fee and monthly “premiums” for what they were told was health insurance. In fact, all they got was a card for discounts with certain providers and pharmacies – hardly, the comprehensive coverage many of them had been promised. The FTC settled with some defendants, while others elected to proceed. In addition to granting summary judgment, the Court banned those defendants from telemarketing, prohibited them from selling healthcare-related products, and imposed a financial remedy of $8.7 million.
Here are some quotes and takeaways illustrating why the Order is recommended reading for marketers.
“In determining whether a representation is likely to mislead consumers acting reasonably, courts consider the net impression created.” Sometimes the defendants – or marketers acting on their behalf – flat-out said the product was insurance. In other cases, they used words like “copay,” “premium,” and “deductible.” In ruling that the defendants had misrepresented their card as insurance, the Court looked at the gestalt: the wording of the pitches, consumer declarations, transcripts of sales calls, and other evidence.
“Proof of intent to deceive is not required to establish liability.” Companies often claim they didn’t mean to mislead consumers, but proof of intent isn’t an essential element under Section 5. The Court cited with favor the 1980 holding in Sears Roebuck & Co.: “A company that deceives consumers through reckless or even simply negligent disregard of the truth may do just as much harm as one that deceives consumers knowingly.” Furthermore, as the Court noted, numerous consumer complaints, internal emails, and a Better Business Bureau investigation “show that, at the very least, PIHC acted with reckless disregard of the truth. That is sufficient to establish liability.”
Companies should monitor what others do on their behalf. The defendants argued they shouldn’t be liable for misrepresentations made by third-party marketers they hired to promote the product. In rejecting that contention, the Court cited a long line of precedent dating back to Goodman v. FTC in 1957: “[T]he principal is bound by the acts of the salesperson he chooses to employ, if within the actual or apparent scope of his authority, even when unauthorized.”
It’s unwise to rely on after-the-fact disclosures. Kieper claimed that buyers got a “Welcome Call” to verify that they understood what they were getting, but the Court wasn’t persuaded by “conclusory assertions about remedial measures.” Even so, the Order cited FTC v. IAB, in which the Eleventh Circuit held that “IAB offers no authority for the proposition that disclosures sent to consumers after their purchases somehow cure the misrepresentations occurring during the initial sales.”
A key to compliance may be in your mailbox. The Court looked carefully at the defendants’ response – or lack thereof – to consumer complaints received directly and through the BBB. What’s the lesson for other marketers? Addressed early on and with the right frame of mind, consumer complaints can actually help companies clear up questionable claims or practices.
The FTC doesn’t have to prove “worthlessness” to prevail. Kieper attempted to counter the FTC’s charges with testimonials from supposedly satisfied customers and documents indicating that some people got discounts. But as the Court held, “Worthlessness . . . is not an element of a claim for deceptive practices.” The opinion also cited caselaw rejecting the argument that the existence of satisfied customers is a defense.
The Telemarketing Sales Rule is broad in scope. The FTC alleged that Kieper violated the TSR through his own misrepresentations and by providing substantial assistance or support to others while knowing – or consciously avoiding knowing – that the other party was violating the Rule. You’ll want to read the Court’s interesting evaluation of facts relevant to the “substantial assistance” portion of the TSR.
Individuals may be liable under Section 5. Looking for a refresher on the law of individual liability under the FTC Act? The opinion offers an analysis of factors courts will consider. For example, the Court cited FTC v. Transnet Wireless for the proposition that “An individual’s status as a corporate officer gives rise to a presumption of ability to control a small, closely-held corporation.” Furthermore, as FTC v. Atlantex Associates held, “[D]irect participation in the fraudulent practices is not a requirement for liability. Awareness of fraudulent practices and failure to act within one’s authority to control such practices is sufficient to establish liability.”
Injunctive relief is at the core of the FTC Act. The FTC Act authorizes courts to do more than simply admonish a defendant to “go and sin no more.” As the Order states, “[C]ourts have discretion to include ‘fencing-in’ provisions which ‘extend beyond the specific violations at issue in the case to prevent Defendants from engaging in similar deceptive practices in the future.’”
Section 13(b) authorizes courts to order ancillary relief, including restitution and disgorgement. It’s an established principle, but always bears repeating: Deceiving your customers can be costly. Among other cases, the Court cited FTC v. Stefanchik for the proposition that requiring full refunds for consumers – and not just turning over profits – is an appropriate remedy.